G.R. No. 166058 April 4, 2007
Emerita Garon, Petitioner, vs. Project Movers Realty and Development Corporation and Stronghold Insurance Company, Inc., Respondents.

FACTS

Project Movers Realty and Development Corporation (PMRDC) obtained two loans from Emerita Garon, secured by assignments of its leasehold rights over commercial spaces. To guarantee its obligation to execute these assignments, PMRDC procured a surety bond from Stronghold Insurance Company, Inc. (SICI). The bond explicitly stated it was “conditioned to guarantee the assignment of Leasehold Rights” and that the surety’s liability would expire on November 7, 1998. When PMRDC defaulted on the loans, Garon demanded that PMRDC execute the deeds of assignment and that SICI comply with its bond. Both failed to comply, prompting Garon to file a collection complaint against both, praying for payment of the loan amounts from PMRDC and enforcement of the surety bond from SICI.
The Regional Trial Court granted summary judgment, ordering PMRDC to pay the loans with interest and SICI to pay its bond liability. The Court of Appeals affirmed but modified the interest rates, applying the legal rate instead of the stipulated high rates. Both PMRDC and SICI appealed to the Supreme Court. PMRDC argued the stipulated interest was unconscionable, while SICI contended its obligation under the bond had expired and was extinguished since Garon’s demand was made after the bond’s expiration date.

ISSUE

The core issues were: (1) whether the stipulated interest rates in the promissory notes were valid and enforceable; and (2) whether the surety company’s liability under its bond had been extinguished.

RULING

The Supreme Court denied the petitions and affirmed the Court of Appeals’ decision. On the first issue, the Court ruled that while interest is due on loans as a matter of law, stipulated rates can be reduced if they are unconscionable. The Court found the stipulated rates of 36% per annum for the peso loan and 17% for the dollar loan, plus a 3% monthly penalty, to be iniquitous and contrary to morals. Applying the principle of pacta sunt servanda with the tempering principle of equity, the Court sustained the appellate court’s modification, imposing the legal interest rate of 12% per annum from judicial demand until the judgment’s finality.
On the second issue, the Court held that SICI’s liability under the surety bond was not extinguished. The bond’s condition was to guarantee the assignment of leasehold rights, an obligation which arose upon PMRDC’s default on the underlying loans. Garon’s formal demand on SICI was made on November 6, 1998, which was before the bond’s expiration date of November 7, 1998. This timely demand rendered SICI’s obligation demandable and fixed its liability. The subsequent expiration of the bond period did not discharge an obligation that had already accrued. The terms of the bond were clear and constituted the law between the parties, and SICI was therefore solidarily liable for the penal sum stated therein.